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Central banks rate cuts
The US
The U.S. Federal Reserve has finally joined the trend of rate cuts. It responded to market expectations by reducing its policy rate by a significant 50 bps, bringing it down to a range of 4.75% – 5.00%. Prior to the decision, there was about a 70% probability priced into the market for such a move, as the Federal Reserve generally avoids surprising investors. However, many analysts had anticipated a more conservative cut of only 25 bps.
It is now evident that the Federal Reserve has shifted its focus, placing greater importance on labour market developments than inflation, at least for the time being. Federal Reserve Chair Jerome Powell hinted that the Fed might have made this rate cut in July if it had access to the most recent labour market data at that time.
A soft landing remains the Fed’s primary goal, with unemployment expected to rise slightly to 4.4% (up from 4.2% in August). The unemployment rate is projected to stabilise at this level throughout 2025, followed by a gradual decline in subsequent years.
The European Union
As expected, the ECB lowered its interest rates during its September meeting as well. The most recent quarterly forecasts from the ECB show minimal changes from the previous outlook, reinforcing the bank’s confidence that inflation will gradually decline and reach its target of 2% by the end of 2025. (2.2% by the end of August, down from 2.6% in July)
Sweden
Swedish inflation continues to decline significantly, and the Riksbank’s forecasts have been, at least partially, off the mark. In August, the Consumer Price Index (CPI) fell to 1.9%, while the CPIF, which excludes interest rate changes and is the Riksbank’s target measure for inflation, dropped to 1.2%. This is the lowest level since 2020 and well below the Riksbank’s forecast of 1.7%.
However, the Riksbank’s credibility remains intact as it accurately predicted the CPIF excluding energy, which reached 2.2% in August. There is little doubt that the Riksbank will lower its policy rate in the upcoming monetary policy announcement on 25th of September. The key question is whether it will opt for a 25 bp cut or a more substantial double cut.
Should the Riksbank choose a modest 25 bps reduction in September, a larger cut is likely in November or December. This is particularly expected as both CPIF and CPIF excluding energy are projected to decline further in the coming months. Inflation expectations could fall even more and potentially stabilise at low levels, a scenario the Riksbank is keen to avoid.
The flip side..
Asia
One of the most significant events in the past month was the Bank of Japan’s unexpected interest rate hike (to about 0.25% from a range of zero to about 0.1%). This unanticipated policy shift triggered a ripple effect across the markets. The rate increase also strengthened the yen, boosting the appeal of domestic Japanese assets. Additionally, the Bank of Japan’s decision signals a more aggressive monetary stance, indicating that the central bank is now taking inflation risks more seriously.
Meanwhile, the Chinese economy is showing signs of a slowdown, with growth falling short of expectations, continued declines in the property market, and reduced exports. Uncertainty also surrounds the country’s long-term growth prospects, and the Chinese government’s efforts to stabilise the economy have so far failed to instil sufficient confidence among investors.
Economic concerns
As major economies have clarified their future monetary policy trends over the past few weeks, markets are now shifting focus from interest rates and inflation to broader economic conditions. Economic concerns and the fact that the stock market’s composite index is approaching correction territory have been key themes throughout the past quarter.
Despite this, a soft landing remains the primary scenario for many central banks. At Carousel, we find it interesting to follow market trends and the varying policies of central banks. However, we believe that the market’s intense focus on central banks this year has been somewhat excessive. Looking ahead, we hope these banks “calibrate” their policies correctly, and we expect upcoming labour market reports and inflation data to shed light on whether this adjustment will be successful.
Financial markets
The current trend of low inflation and declining interest rates is providing a supportive environment for both property and equity markets. However, stock valuations remain elevated, largely driven by the strong performance of a few major technology companies. This has made equity markets particularly vulnerable, a sensitivity that became evident in early August when weak economic data from the U.S. and a rate hike by Japan triggered market volatility.
Although bond markets are expected to show more stability, unusual levels of volatility have been observed here as well. Even the U.S. Treasury market, often regarded as one of the most stable financial systems globally, has experienced significant fluctuations, influenced by shifting data and herd behaviour among investors.
At the end of June, the Swedish Riksbank opted to maintain its interest rate but clearly indicated potential rate cuts in the second half of the year. The Riksbank’s own forecasts for inflation, together with all key economy indicating components, including economic growth, unemployment rate, combined with moderate wage increase across the whole country, suggest that the policy rate should have been lowered in this announcement. However, we speculate that this must be weighed against the fact that some major central banks around the world remain uncertain about their future policy rate settings, which have influenced the Riksbank’s decision.
Office property market overview
A combination of negative trends has affected the office real estate market:
- Declining demand for office space: The demand for office space has steadily decreased, particularly from 2023 and onwards.
- Rising vacancies: The volume of vacant office spaces has consistently increased, with the most noticeable rise occurring in the first half of 2024.
The growing gap between supply and demand can be attributed to several factors. Primarily, the pandemic has altered work patterns, leading many businesses, particularly in cities like Stockholm, to relocate to more efficient office spaces closer to or within the CBD.
The Stockholm market
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In Stockholm, the city centre resisted these negative trends longer than most areas, but began to feel the pressure in 2024. Rental rates in the CBD have stagnated, and in some cases, even declined as a strategy to retain stable tenants and maintain occupancy levels. Capitalization rates in the most desirable parts of the CBD have risen to around 4.25%, marking an increase of approximately 80 bp since early 2022. Certain central locations are facing higher vacancy rates than others, often due to the quality of the property, including factors like facilities, services, technical infrastructure, and lease terms.
Cautious approach from international investors
After a period of strong international activity in the transaction market, where international investors held a 22% share in 2022 and 29% in 2023, their participation declined sharply to 18% in Q1 2024 and further down to 10% in Q2. This brought the overall share to just 14% in the first half of 2024. The decline suggests heightened competition from domestic investors, likely spurred by initial interest rate cuts and expectations of further reductions later in the year. The reduced presence of foreign capital may have contributed to the market slowdown in 2024, underscoring the critical role international investment plays in Sweden’s real estate sector. As the European Central Bank, the Federal Reserve, and neighbouring countries implement more rate cuts, market conditions could improve, potentially reigniting interest from both domestic and international investors.
